According to the London Stock Exchange Group, Securities Financing Transactions (SFTs) are “any transaction where securities are used to borrow cash, or vice versa.
NATURE OF FINANCING TRANSACTIONS
There are two types of financing transactions and they are:
In this type of financing, the investor acquires shares of the company upon provision of funds and the return of sales is by dividend OR sale of acquired funds.
In this type of financing, facility is made available at a fixed rate of interest and predetermined maturity date. Borrowing can either be secured or unsecured.
CONCEPT OF SECURITY
Why take security?
- To reduce credit risk or obtain priority over other creditors in the event of the debtor’s bankruptcy or liquidation
- Security gives the creditor a certain measure of influence or control over events, especially where a creditor holds a fixed and floating charge covering substantially the whole of a debtor company’s assets.
- See S20(2)(a) of the BOFIA 1991 provides as follows:
“A bank shall not, without the prior approval in writing of the bank permit to be outstanding, unsecured credit facilities of an aggregate amount in excess of N50,000…”
TYPES OF SECURITY INSTRUMENTS
The following are the types of security instruments:
Mortgage – Mortgage is the conveyance of title. It complies with registration requirement.
Pledge – Pledge is the transfer of possession. There is no registration requirement.
Lien – Lien is simply possessory right.
Charge – It is an Encumbrance, lien or claim on an asset. S197 of CAMA requires the registration of charges on companies assets.
WHAT CONSTITUTES A SECURITY INTEREST?
A security interest is the right given to one party in the assets of another party to secure payment or performance by that other party or by a third party of an obligation owed the party taking security.
A fixed or specific consensual security interest possesses the following characteristics:
- It is a right given by a debtor to a creditor in an asset;
- The right is by way of grant of an interest in the debtor’s assets, not by way of reservation of title to the creditor;
- The right is given for the purposes of securing an obligation;
- The asset is given in security only, not by way of outright transfer
CLASSIFICATION OF SECURITY
Security may be broadly classified as follows:
. Real and Personal Security
– Real Security: an asset, whether of the debtor or of a third party;
– Personal Security: security in the form of personal undertaking which reinforces the debtor’s primary undertaking to give payment or other performance.
. This is usually given by a third party as a surety under a guarantee.
. The debtor too can provide a personal undertaking in a more easily assignable form.
. Fixed and Floating Security
– Under a fixed charge the assets is appropriated to the satisfaction of a debt immediately or upon the debtor acquiring an interest in it.
– Under a floating charge, appropriation is deferred. The chargee’s rights attach not to a specific asset but to a shifting fund of assets.
– A floating charge can also be made on variable assets.
RECURRING CONCEPTS IN SECURITY TRASACTIONS
. Agreement to give security – treated as if they were actual transfer because equity treats as done that which ought to be done (See Walsh v. Lonsdale) (1881)29 ch. D 9.]
. Power of Attorney: In other to further secure the creditor from the whims and caprices of the debtor especially in cases where the creditor do not have title to the charged asset It is important that a clause like this be inserted in a Security Agreement. A model Power of Attorney Clause would read thus:
“The Borrower irrevocably appoint, by way of security, the Creditor to be their attorney (with full power to appoint substitutes and to sub-delegate) for them, in their name, on their behalf and as their acts and deeds or otherwise to sign or execute…”
. Contractual Set-off – Contractual Set-off takes this form: “A” deposits money with “B” Bank under an agreement which empowers B Bank to set-off against its deposit liability any claim it has against A on any other account. A usual Contractual Set-off clause would be drafted as follow:
“The Borrower hereby authorizes the Bank, upon the occurrence of an Event of Default which is continuing, to set-off against the Secured Obligations any amount or other obligation owing by the Borrower to the Bank”
. Condition of Repayment: This Clause ordinarily sets out the modalities for the repayment of the loan sum.
. Negative Pledges: An agreement by the debtor not to encumber his assets in favour of a 3rd party, or not to encumber them by way of security which would rank ahead of, or pari passu with the security given to the creditor. In other to sufficiently protect the interest of the creditor, a Negative Pledge clause that reads thus should be inserted in the security document:
“Save for the Permitted Security, the Borrower and the Guarantors shall not, without the prior written consent of the Security Trustee, create or permit to subsist, nor agree or purport to create or permit to subsist, any security interest on the whole or any part of the Charged Assets whether ranking in priority to or pari passu with or after the Security Interests created by or pursuant to this Deed.”
. Assignment of Insurance Proceeds and the Loss Payee Clause:
– This is very potent in financing of export and import transactions.
– A typical clause in the facility letters of many banks in Nigeria would read as follows:
“An all risks insurance policy covering the various supplies and raw materials is to be issued by an acceptable insurance company. The interest of the Bank is to be noted on the policy document and the Bank designated as loss payee”.
– If any loss resulting from an insured risk occurs, the indemnity will inure in the bank’s favour.
This broadly explains what security in financing transactions is all about. Thank you for reading.
Photo Source: Boddie & Associates, P.C.